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Why Trustees Might Sell Underwater Rental Properties to Creditors

When an underwater rental property is involved in a New York bankruptcy case, the trustee usually won’t try to sell it, particularly if the debtor is current on the payments. However, some trustees might actually try to sell an underwater rental to the lender under certain circumstances. This can be a disappointment to some debtors who wanted to keep the rental property if they had started falling behind on the payments.

Why would the trustee do this? If the lender suspected that the debtor would be unable to make the mortgage payments on the rental property, or if the debtor used the automatic stay in bankruptcy to stop a foreclosure, then the lender might be willing to pay money to obtain the property now to avoid foreclosure later. Taking the property via foreclosure might be a costly legal hassle, and simply paying out several thousand dollars to the bankruptcy estate—even though the property is worth less than the mortgage itself—can be a more convenient course of action.

The lender isn’t the only one who might benefit from this maneuver. The trustee can take the proceeds from the sale and distribute them to the other creditors that may have expected to receive nothing at all otherwise, so it’s understandable that they’d look favorably on the deal. Meanwhile, as always, the trustee receives a commission for liquidating the bankruptcy estate.

The debtor, on the other hand, loses a property that he or she might have been able to keep.

Part of the reason the sale will go through is that no one else is going to be interested in bidding up the value of the rental property as it’s already underwater. The debtor, obviously, won’t be able to afford it. Importantly, the sale hinges on the lender’s desire for the property. In many instances, the lender won’t really care if it’s being paid its mortgage payments on time by the debtor.

If you have an underwater rental property that you would like to keep through a bankruptcy, talk to an experienced New York bankruptcy lawyer to determine your options.

For answers to more questions about rental properties in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy trustee actions Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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